What is market price and what are the firms profits

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Suppose that market demand for golf balls is described by Q=90−3P, where Q is measured in kilos of balls. There are two firms that supply the market. Firm 1 can produce a kilo of balls at a constant unit cost of $15 whereas firm 2 has a constant unit cost equal to $10.

1. Suppose the firms compete in price. How much does each firm sell in a Bertrand equilibrium? What is market price and what are the firms’ profits?

2. Suppose now that the firms compete in quantities, but firm 1 is the Stackelberg leader and can announce its quantity before firm 2 chooses its strategy. How much does each firm sell in a Stackelberg equilibrium? What is the market price and what are the firms’ profits?

3. Would your answer in (2) change if there were three firms, one with unit cost = $20 and two with unit cost = $10? Explain why or why not (one or two sentences are enough).

Reference no: EM131092326

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